In Silicon Valley, help not wanted

If Stephen Levy were to write a book about Silicon Valley, he'd likely riff on the title of a famous Charles Dickens novel. He sees two economies going in opposite directions.

"At the high-tech end, the real story that we see is a tale of two economies," says Levy, an economist who directs the Palo Alto, Calif.-based Center for Continuing Study of the California Economy. As Levy sees it, the contradictions are most keenly revealed in the statistics about tech professionals who have jobs and those collecting unemployment checks. The tech mecca continues to lose jobs in the fields of software, semiconductors, and computer and communications hardware. But at the same time, average pay for people working within Silicon Valley's different tech sectors climbed in 2003, the last year for which such recorded data are available.

I think we're kind of trying to live off of our legacy. It's not a Silicon Valley problem; it's a national problem.

Levy advises the nonprofit group Joint Venture: Silicon Valley Network, which recently released its annual index on the region. The index shows a curious combination of strengths and weaknesses. For example, venture capital investment in Silicon Valley rose by 15 percent last year, and the region now receives 35 percent of the nation's venture capital, up from 14 percent in 1995. What's more, job losses were less severe than in the previous two years. On the other hand, the gap between low-income households and other households increased. And housing became less affordable, especially for the poorest residents.

CNET News.com spoke to Levy about the state of Silicon Valley's economy, challenges the area faces from other emerging technology hubs and the first thing he'd do to improve Silicon Valley's prospects. (Hint: It's a lot lower-tech than a new computer chip or piece of software.)

Q: Silicon Valley lost 1.3 percent of its jobs last year, and average pay went down by 1 percent. Is it a sign that the high-tech economy is in trouble?
A: The job levels have fallen really substantially. The headline is that since 2000, Santa Clara County lost over 200,000 jobs. It lost a little over 20 percent of its job base, and by comparison, that's the largest amount that any metropolitan area lost since the Great Depression. So 2004 was a very modest continuation of those losses when other areas were turning around. Wages went up in high tech and down a little bit overall.

We are...in a big hiatus on the infusion of venture capital. It's really back down to '97 and '98 levels.

At the high-tech end, the real story that we see is a tale of two economies. If you ask how high-tech companies are doing, their sales are up, and the profits are often up, and the exports are up. And within the high-tech industry, the wages are up, despite that overall figure. Kind of everything is up but job numbers. And that's a huge "but." So people who are working are starting to do better. And then you have the rest of the economy--the people who are waiting to see job growth. And that's not happening.

Do you think that this is a predictable change in the wake of the boom of the late '90s? In other words, was it too big of an expansion then?
It's the balance between sales growth and productivity. When sales were growing by 20 percent, whatever productivity was, the sales level was enough to hire a lot more workers. But now sales overall are only growing by 6 percent or 8 percent or 10 percent. And you've still got productivity and consolidation. It doesn't support an increasing work force. We're not growing in demand worldwide fast enough to support the kind of job growth that we had in the '90s.

We are also in a big hiatus on the infusion of venture capital. It's really back down to '97 and '98 levels. The question is, can it go a lot higher?

Last year was an exception, is that correct? There was a 15 percent increase.
I'm not sure whether it was 15 percent. But it's like you dropped 80 percent and then you bounce back 5 percent or 10 percent. The other way to look at this is asking, "Was 2004 better than 2003?" Yes, except for job growth. And the same holds for 2005. If you ask, "Is either year remotely like 2000?" the answer is no. So it depends on your date of comparison.

You expect 2005 to be continuing somewhat better trends?
For the companies. I'm not sure there will be a lot of employment growth. If you're in, you may be able to do better. If you're not in, it might be hard to get in.

What do you say about the impact of offshore economic trends? In other words, sending work to India and China and the Philippines. Is that playing a role in the job losses?
I think it plays a modest role nationally. There's always been globalization. Now there's globalization in services. I would emphasize that what's different now is the spigot of new company creation; it's a lot less forceful than it was (in the late 1990s).

You've got to be inventing something new to do, because the older stuff gets mature. We've stopped doing the creation side, and so the outsourcing is more visible, but I don't think it's accelerated that much.

When you say stop doing the creation side, can you tell me more about what you mean?
It's the venture capital--the level of the capital funding is down 80 percent or 70 percent. Maybe the last two or three years were an anomaly, but then that would mean that the really high rates of job growth were an anomaly, and we don't know right now.

There was an impressive figure of the Silicon Valley gaining a larger share of the nation's venture capital.
It's true. What that says is, if you look at Silicon Valley, we haven't yet suffered any competitive loss. We are in an industry that's not creating jobs. It's a little bit like Los Angeles and the aerospace

industry. They did lose a little share, but mainly what happened was that the aerospace market went away all over the place when the defense spending was cut. Other areas are hurting, too. It's just that we have more high tech here, so it's more important.

So you're not so concerned about Silicon Valley losing its status as the tech capital?

I am concerned going ahead. I'm not concerned based on what's happened. I'm concerned about a different set of issues. I'm concerned about housing prices, and if people come here, whether they would find places for their kids in school.

Will they tolerate the commute? I'm worried about the quality of life and housing challenges in an increasingly competitive world. That's prospective--where we could lose our advantage, because people came here because it was a great place to live and work.

I've been hearing about companies trying to attract what would be offshore IT dollars by locating in lower-cost U.S. regions like Arkansas or Oklahoma City. Do you think there is a chance that those areas could challenge Silicon Valley?
They aren't doing our stuff. They are doing stuff, but they are not doing the innovation. We have a niche, and the venture capital numbers tell you the story. Whenever anything gets maturing, it's cost-conscious. It's not going to remain here in great numbers for a long time. I mean, 30 years ago, everybody said we were dead because of Malaysia and Taiwan.

That was when you were losing the manufacturing--circuit boards and stuff like that.
Yeah. We always have to be the next new thing. That's generically what we do, and the next new thing has not yet gone to Arkansas. The mature stuff may. But if you look at a chart, you don't see Silicon Valley losing a share of jobs dramatically. You just see the whole high-tech job base kind of going with no growth.

Do you think that it's more likely that the next new thing could start happening overseas more? So many Silicon Valley companies have manufacturing operations in Asia and are now putting research facilities in Bangalore.
Yes. I think the United States is in a competition we don't think we have to pay attention to.

		Special report Offshoring: The reality behind the politics CNET News.com examines the problems, solutions.

I think we're kind of trying to live off of our legacy. It's not a Silicon Valley problem; it's a national problem. There are other countries, including China and India, that now have science, technology and skilled people. And the Internet is a great leveler. So, yes, that's a national threat.

What would you do as the first one or two or three steps to improve the Silicon Valley economy, the high-tech economy? Is it the quality-of-life stuff that you would focus on?
Yeah, I would. I may be an outlier. But I would.

Give me an example what would you do.
Housing would be the No. 1 thing. If you went to talk to the city of San Jose and the economic development people, they got it. People around here are rezoning voluntarily. (They are taking) industrial research and development land that wouldn't be built until 2050, and putting in housing there. Every time they build a house, they help with the price. They say, "You can locate in Silicon Valley, and we've got more workers now, (and) they don't have to commute three hours."

So housing becomes a very important part of the competition. So does making sure that all of the schools are good. So wherever your workers locate in the region, their kids are going to a good school. It's important. And transportation--we have to have world-class mobility and world-class places to live because we're trying to compete for the best and the brightest. We are not competing for the stuff that's going to Arkansas.

Do you worry about the notion that the tech industry has gotten lot of negative press over the past couple of years? People have heard about the offshoring stuff, the dot-com bust and high rates of unemployment in the tech field. Do you think there is a need for the tech industry to almost have a public-relations campaign to get people interested?
No. California just passed the stem cell funding initiative. Everybody got really excited, and we all kind of "got it" that way. I think the excitement comes back the minute you do something tangible. We may not have the levels of job growth that we had before, but that's a productivity phenomenon. Google was exciting.

Even the space efforts, I imagine, can generate interest.
Yeah. And there's a big nanotech initiative at NASA here that the congressmen got funded. We could be the nanotech center and the stem cell center.